Financial planning 2023: 8 essential factors to consider

Having filed last year’s tax return, you probably feel like a break from dealing with your finances. But with the end of the tax year fast approaching, now is a good time to review your affairs

As 2023 starts to gather pace and we edge towards spring, it pays to make time to review your financial planning and investments. The 5th April not only marks the end of the UK financial year,  but is when a number of changes come into effect following November’s dramatic Autumn Statement.

Due to the broad range of tax increases and spending cuts announced by Chancellor Jeremy Hunt, together with rampant inflation, prudent planning is more important than ever. Here, we pinpoint eight key areas to consider:

1. Married couples and civil partners should reassess how their assets are divided

People at all levels are paying more tax, so careful tax planning is a must for married couples and civil partners. This is particularly true when one partner has a far higher income than the other. To take maximum advantage of tax-free allowances and lower rate tax bands, it may be necessary to rearrange who owns which investments. By doing so, they are likely to reduce their overall tax bill.

The increased tax burden is due to soaring inflation, combined with a continued freeze on personal allowances and the threshold for paying higher rate tax. In addition, high earners will now pay additional rate tax of 45%, on income over £125,140 (reduced from £150,000). And the dividend tax-free allowance will be halved to £1,000.

2. Increase investments set aside for retirement

The increase in state pensions is welcome, but it remains too low to provide a comfortable retirement. In 2021, the Pensions and Lifetime Saving Association (PLSA) calculated that to achieve a ‘moderate living standard’ in retirement, a single person, outside London, would need £20,800 a year. A couple would need £30,600. Inflation continually pushes these figures higher.

It’s worth noting that pension contributions are still an efficient way of saving for retirement. One possible option is to opt for salary sacrifice, where you agree to reduce your salary and your employer then pays the difference into your pension. Thereby reducing the overall amount of Income Tax and National Insurance paid.

Lower National Insurance rates reduce the overall gain of using salary sacrifice to make pension contributions, but lower-rate tax payers still receive a 17.7% boost on contributions and higher-rate tax payers 33.9%.

3. Use your capital gains tax exemption before 6 April

Capital gains tax (CGT) may be payable on any profit made selling an asset. Until 6 April, up to £12,300 of gain is exempt from tax. However, this year sees a steep reduction in the annual amount exempt from tax, with it falling to £6,000 and to just £3,000 next year. Therefore, you should consider whether it would be sensible to crystallise any available gains, so that the exemption can be used before the end of this tax year, and again in 2023/24.

4. Maximise your ISA contributions

Individual Savings Accounts (ISAs) remain a very effective way to shield your investments from tax, particularly in light of the afore-mentioned changes to CGT. At present, you can contribute up to £20,000 per year, either from cash or by transferring existing investments into ISAs.

5. Review your inheritance tax planning

Regular reviews in this area are vital. 2022 has not been the best of years for many investments, with values falling in the wake of surging inflation and rapidly increasing interest rates.

However, there has been a silver lining for some. Due to increased yields, and associated income, now may be a good time to consider regular gifts out of surplus income. Such gifts are immediately exempt from IHT, over and above the normal annual exemptions.  For such gifts to be effective, they must be ‘habitual and substantial’. That is, regular and with a tangible value. This could potentially also be a good time to make more substantial lifetime gifts.

6. Employee shareholders need to consider whether to draw a bonus or a dividend

Upcoming increases in Corporation Tax mean that an employee shareholder is more likely than before to pay a greater amount of tax on a dividend than a bonus. Other tax changes may also have an impact and a company director who pays higher-rate tax is likely to be better off receiving a bonus, rather than a dividend. Although, if the company’s profits are under £50,000, they are taxed at the small companies’ rate of 19%:

7. Buy to let investors may want to consider alternative investments

The increase in mortgage rates has put pressure on buy-to-let investors. This comes on top of earlier changes to mortgage interest relief for individual buy-to-let investors. It is no longer possible to deduct mortgage costs from rental income when calculating income for your tax return. Instead, you now receive a tax-credit, based on 20% of your mortgage interest payment. Consequently, higher-rate tax payers pay more tax, potentially making a loss. Others could be pushed into a higher tax bracket.

Landlords also face possible reforms to security of tenure rules in England, new minimum energy standards and falling property values. With property prices expected to fall significantly this year, it’s no wonder that some are considering alternative investments.

8. Review your investments

Last year was a painful one for both equity and bond markets, and this year is likely to remain volatile.  However, as equities are a ‘lead indicator’ of what is expected economically, now would be a good time to review your investment objectives and reappraise your attitude to risk. That way, you can take optimal advantage of the eventual recovery.

2022 saw the end of a long ‘bull run’, with value investments proving more resilient than growth investments, so now may be a good time to re-evaluate your holdings and conduct a good spring clean.

The last few months have also seen a steady weakening in the US Dollar, which means that unless you mitigate the currency risk through hedging, any further losses in Dollar-based investments could be exacerbated.

Last year was especially painful for interest-rate sensitive investments, such as UK gilts and corporate bonds.  Despite being perceived as lower-risk, and a diversifier against equity volatility, bonds had a torrid 2022.  However, with strong signs that inflation and interest rate rises will peak this year, and likely begin to fall, bonds are beginning to become a more attractive proposition. Should interest rate expectations fall, they are likely to become an increasingly important part of the investment mix, as you could lock into both higher yields and the prospect of capital gains.

So, in conclusion, now would be a good time to review your overall financial affairs, in order to plan for forthcoming tax changes and to get your investments best placed for the future.

At AJB Wealth, our experienced and highly-qualified team is well placed to work with you, and your other professional advisers, to help you achieve financial efficiency and security. To arrange an initial consultation, please book a meeting, or call us on 01483 774 070.

Important: The content of this bulletin is for general consideration only, and does not constitute advice. No action must be taken, or refrained from being taken, without advice and this company accepts no responsibility for any loss occasioned as a result of any such action, or inaction. You are also reminded that investments can fall, as well as rise, and, in the event of early encashment, you may receive less back than your original investment.